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An Introduction to Accounting
Module F1
1-2
Public Accounting
Audit Services
Tax Services
Consulting Services
Private Accounting
Careers in Accounting
1-3
Why Is Accounting Important?
Business is about making money.
Need resources: Financial resources, physical resources
and labor resources
Resource allocation decisions of investors and creditors
depend on reliable and relevant information about firms
financial positions, profitability, and risk.
Financial reports that a firm prepares are a key source of
this information.
The process of preparing those reports is financial
accounting, or, more broadly, financial reporting.
Managerial accounting helps managers to run the
business.
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Physical and Labor Resources
Physical
Natural Resources
Labor
Intellectual and
Physical
1-5
Financial Resources
Investors
Ownership Interests
Creditors
Claims to Resources
1-6
Measurement Rules
Generally Accepted
Accounting Principles
1-7
Entity Concept
Accounting reports are prepared for particular
individuals or organizations called reporting
entities.
Focus on what happens to the business rather than
to its investors, creditors, customers or employees.
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Financial Statements
Balance
Sheet
Income
Statement
Statement
of Changes
in Equity
Statement
of Cash
Flows
1-9
Elements of Financial Statements
The
elements
represent
broad
categories.
1. Assets
2. Liabilities
3. Equity
4. Contributed Capital
5. Revenue
6. Expenses
7. Distributions
8. Net Income
9. Gains
10. Losses
We will discuss
elements 1-8 in this
module. We will save
elements 9 and 10 for
a later module.
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Assets are Resources Used to
Produce Earnings
The assets of a business have claims by
Creditors Investors
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Based on the two sources of claims:
1. Creditors (liabilities)
2. Investors or owners (equity).
Accounting Equation
1-12
Accounting Equation
Assets = Liab. + Equity
500 $ = 200 $ + 300 $
Claims
1-13
Accounting Equation
Common Stock + Retained Earnings

1-14
Recording Business Events Under
the Accounting Equation

Businesses obtain assets
from three sources:
1. Owners
2. Creditors
3. Profitable Operations
Now, lets look at the effects of asset source transactions
on the accounting equation.
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Event 1: Chetan Corporation (CC) was formed on
January 1, Year 1, when it issued common stock
for $200,000 and collected cash.
1. CC increases assets
(cash).
2. CC increases
stockholders equity
(common stock).
Asset Source
Transaction
= Liab. +
Cash + Land = N. Pay. + C. Stk. + Ret. Ear.
200,000 + n/a = n/a + 200,000 + n/a
Assets Stockholders' Equity
Double-Entry
Bookkeeping
1-16
Event 2: CC acquired an additional $300,000 of
cash by borrowing from a creditor.
Cash + Land = N. Pay. + C. Stk. + Ret. Ear.
Beginning Balance 200,000 + n/a = n/a + 200,000 + n/a
Acquired Cash by Issuing Note 300,000 + n/a = 300,000 + n/a + n/a
Ending Balance 500,000 + n/a = 300,000 + 200,000 + n/a
1. CC increases assets
(cash).
2. CC increases liabilities
(notes payable).
Asset Source
Transaction
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Event 3: CC paid $400,000 cash to purchase land.
= Liab. +
Cash + Land = N. Pay. + C. Stk. + Ret. Ear.
Beginning Balance 500,000 + n/a = 300,000 + 200,000 + n/a
Paid Cash to Buy Land (400,000) + 400,000 = n/a + n/a + n/a
Ending Balance 100,000 + 400,000 = 300,000 + 200,000 + n/a
Assets Stockholders' Equity
1. CC decreases assets
(cash).
2. CC increases assets
(land).
Asset
Exchange
Transaction
1-18
Event 4: CC obtained $75,000 cash by leasing
campsites to customers.
= Liab. +
Cash + Land = N. Pay. + C. Stk. + Ret. Ear.
Beginning Balance 100,000 + 400,000 = 300,000 + 200,000 + n/a
Acquired Cash by Earning Revenue 75,000 + n/a = n/a + n/a + 75,000
Ending Balance 175,000 + 400,000 = 300,000 + 200,000 + 75,000
Assets Stockholders' Equity
1. CC increases assets
(cash).
2. CC increases
stockholders equity
(retained earnings
increased by
revenue).
Asset Source
Transaction
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Event 5: CC paid $60,000 cash for operating
expenses such as salaries, rent, and interest.
= Liab. +
Cash + Land = N. Pay. + C. Stk. + Ret. Ear.
Beginning Balance 175,000 + 400,000 = 300,000 + 200,000 + 75,000
Used Cash to Pay Expenses (60,000) + n/a = n/a + n/a + (60,000)
Ending Balance 115,000 + 400,000 = 300,000 + 200,000 + 15,000
Assets Stockholders' Equity
1. CC decreases assets
(cash).
2. CC decreases
stockholders equity
(retained earnings
decreased by
expenses).
Asset Use
Transaction
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Event 6: CC paid $5,000 in cash dividends to its
owners.
= Liab. +
Cash + Land = N. Pay. + C. Stk. + Ret. Ear.
Beginning Balance 115,000 + 400,000 = 300,000 + 200,000 + 15,000
Used Cash to Pay Dividends (5,000) + n/a = n/a + n/a + (5,000)
Ending Balance 110,000 + 400,000 = 300,000 + 200,000 + 10,000
Assets Stockholders' Equity
1. CC decreases assets
(cash).
2. CC decreases
stockholders equity
(retained earnings).
Asset Use
Transaction
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Event 7: The land that CC paid $400,000 to
purchase had an appraised market value of
$500,000 on December 31, Year 1.
Historical Cost
Concept
Requires that most
assets be reported at
the amount paid for
them (their historical
cost) regardless of
increases in market
value.
Reliability
Concept
Independent
verification is required
for reliability.
Instead appraisal values
are opinion and will
differ between
appraisers.
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Classify business events
Classify events into one of three categories:
Asset source transactions increase the total
amount of assets and increase the total
amount of claims
Asset exchange transactions decrease one
asset and increase another asset
Asset use transactions decrease the total
amount of assets and the total amount of
claims.
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Summary of Transactions
= Liab. +
Cash + Land =
Notes
Payable +
Common
Stock +
Retained
Earnings
Other
Account
Titles
Event - $ - $ - $ - $ - $
1 200,000 200,000
2 300,000 300,000
3 (400,000) 400,000
4 75,000 75,000 Revenue
5 (60,000) (60,000) Expense
6 (5,000) (5,000) Dividend
7 n/a n/a n/a n/a n/a
110,000 $
+
400,000 $
=
300,000 $
+
200,000 $
+
10,000 $
Assets Stockholders' Equity
Color Code Legend
Green = numbers used in the statement of cash flows
Red = numbers used in the balance sheet
Blue = numbers used in the income statement
Next we will prepare the
financial statements for RCS
using the data presented above.
1-24
Preparing Financial Statements
Matching
Concept
Result of
Operations
Accounting
Period
Revenue (asset increases) 75,000 $
Operating Expenses (asset decreases) (60,000)
Net Income 15,000 $
Beginning Common Stock - $
Plus: Common Stock Issued 200,000
Ending Common Stock 200,000 $
Beginning Retained Earnings - $
Plus: Net Income 15,000
Less: Dividends (5,000)
Ending Retained Earnings 10,000
Total Stockholders' Equity 210,000 $
Chetan Corporation
Income Statement
For the Year Ended December 31, XXXX For the Year Ended December 31, Year 1
1-25
Preparing Financial Statements
Beginning Common Stock 0
Plus: Common Stock Issued 200,000
Ending Common Stock 200,000 $
Beginning Retained Earnings 0
Plus: Net Income 15,000
Less: Dividends (5,000)
Ending Retained Earnings 10,000
Total Stockholders' Equity 210,000 $
Chetan Corporation
Statement of Changes in Stockholder's Equity
For the Year Ended December 31, Year 1
For the Year Ended December 31, 2012
1-26
Preparing Financial Statements
Liquidity
Assets
Cash 110,000 $
Land 400,000
Total Assets 510,000 $
Liabilities
Notes Payable 300,000 $
Stockholders' Equity
Common Stock 200,000 $
Retained Earnings 10,000
Total Stockholders' Equity 210,000
Total Liabilities and Stockholders' Equity 510,000 $
Balance Sheet
As of December 31, Year 1
Chetan Corporation
As of December 31, XXXX
1-27
Preparing Financial Statements
Operating
Investing
Financing
Cash Flows from Operating Activities
Cash Receipts from Revenue 75,000 $
Cash Payments for Expenses (60,000)
Net Cash Flow from Operating Activities 15,000 $
Cash Flows for Investing Activities
Cash Payments to Purchase Land (400,000)
Cash Flows from Financing Activities
Cash Receipts from Borrowing Funds 300,000
Cash Receipts from Issuing Common Stock 200,000
Cash Payments for Dividends (5,000)
Net Cash Flow from Financing Activities 495,000
Net Increase in Cash 110,000
Plus Beginning Cash Balance -
Ending Cash Balance 110,000 $
Chetan Corporation
Statement of Cash Flows
For the Year Ended December 31,Year 1 For the Year Ended December 31, 2012
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From One Accounting Period to
the Next
Assets, Liabilities,
and Stockholders
Equity accounts are
PERMANENT
accounts - The year
end balance
becomes next years
beginning balance.
Income Statement
accounts are
TEMPORARY
accounts, closed at
year end. Next
years balance
begins at zero.
Dividends are also
closed at year end.


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= Li ab +
Event No. Cash + Land = N.pay + Com.stk + Ret.Earn Rev - Exp. = Net I nc.
Beg.bal 0 + 0 = 0 + 0 + 0 0 - 0 = 0 NA
1 200,000 + NA = + 200,000 + - = 200,000 FA
2 300,000 + = 300,000 + + - = 300,000 FA
3 (400,000) + 400,000 = + + - = (400,000) I A
4 75,000 + = + + 75,000 75,000 - = 75,000 75,000 OA
5 (60,000) + = + + (60,000) - (60,000) = (60,000) (60,000) OA
6 (5,000) + = + + (5,000) - = (5,000) FA
7 NA + NA = NA + NA + NA NA - NA = NA NA NA
Total 110,000 400,000 300,000 200,000 10,000 75,000 (60,000) 15,000 110,000
Balance Sheet Income Statement
Assets Stockhol ders' equi ty
Statement of cash
flows
Horizontal Financial Statements
Model
1-30
Annual Reports
(1)Financial Statements
(2)Notes
(3)Managements Discussion and
Analysis (MD&A)

Traditionally, large companies
distributed expensive annual
reports with many color
photographs. Now most
companies provide a link to
the Annual Report on their
website.

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